MEDIA

MEDIA; A 'Yes, Lord Black' Board Says 'No'

By GERALDINE FABRIKANT

Published: February 16, 2004

Correction Appended

Whatever the outcome of the Delaware Chancery Court trial that begins Wednesday in the dispute between Hollinger International, the newspaper company, and its former chairman, Conrad M. Black, there can be no disputing this: In recent years the board gave Lord Black considerable latitude in managing and intermingling the company's business affairs with his own.

Consider Hollinger's $8 million purchase of a set of Franklin Delano Roosevelt's personal papers while Lord Black was at work on a Roosevelt biography. The board did not ask for an independent evaluation of the papers' market value before signing off on the deal in December 2002, nearly two years after the purchase. The only estimate was a letter from the seller, who had acquired the papers for $3.5 million -- less than a year before Lord Black bought them, but judged the collection to be worth $12 million to $14 million.

Nor, according to board minutes described in a shareholder lawsuit, did the directors seek an independent appraisal of two Hollinger newspapers in Washington State before agreeing to sell them for 50 cents each in February 2001 to a separate company in which Lord Black held a large stake. Within two years, that company, Horizon Publications, sold the two papers for a total of at least $730,000, according to people involved in the transactions.

In a 2002 Canadian court decision against a Hollinger unit, the judge's ruling cited serious accusations of conflicts of interest between Hollinger and Horizon. And yet, the Hollinger board was never apprised of the lawsuit or its outcome, according to several people close to the board.

Those examples ''suggest an executive who is interested in pursuing his personal objectives, not corporate objectives,'' said Charles M. Elson, a professor of corporate governance at the University of Delaware. But Professor Elson is among critics who say that the Hollinger International board also bears a share of responsibility.

''The board should have been concerned about the acquisitions of the newspapers, for example,'' he said, ''not necessarily because of the amount, but because of the purchases themselves.''

Hollinger International's board has distanced itself from Lord Black since he resigned as chief executive last fall in response to investors' increasingly tough questions about certain payments he and other top officers received.

In the last year, one director has left. Three new ones, who are not named in shareholder suits, have arrived. Three other directors -- Lord Black; his wife, Barbara Amiel Black; and the vice chairman, Daniel W. Colson -- have been held at arm's length from the board's efforts to investigate problems and consider offers for the company.

And yet, the core of the company's 11-member board consists of directors who were in place before the rupture with Lord Black last year. These include two longtime directors and friends of Lord Black, Henry A. Kissinger, the former secretary of state, and Richard N. Perle, the former head of the Pentagon's Defense Policy Board, who were members of an informal group of international advisers to Hollinger that met periodically during the 1990's.

Mr. Kissinger and Mr. Perle have not returned telephone calls in recent days seeking comment. And a spokesman for Hollinger International said that board members would not comment. Lord Black also declined to comment for this article.

Several people close to the board, speaking on condition of anonymity, insist that it was not negligence, but something more like awe, that accounts for the free rein Lord Black was given. After all, he had transformed Hollinger from an obscure Canadian owner of mines and supermarkets into the holder of more than 100 daily newspapers, including The Daily Telegraph in London, The Jerusalem Post and The Chicago Sun-Times. He moved in circles that included Valéry Giscard d'Estaing and Margaret Thatcher and, after renouncing his Canadian citizenship, was made a British lord.

''People genuinely admired him; they trusted the guy,'' said one of the people close to the board. ''Conrad created this sense that he understood the business, and he knew what he was doing. Besides, Lord Black was the C.E.O. and the controlling shareholder.''

The trial that begins Wednesday in Delaware involves a lawsuit brought by the Hollinger board, which is seeking to block Lord Black's deal to sell his stake in the company to the Barclays, brothers who own newspapers in Britain. The trial will also consider a counterclaim by Lord Black that he had the right to amend Hollinger's bylaws to prevent other board members from interfering with his Barclay deal.

But beneath those tactical questions are more fundamental ones about who was looking out for the shareholders. In a separate suit, pending in the federal district court in Chicago, the company seeks to recoup more than $200 million in payments that Lord Black and other top executives received from the company. Two institutional investors have also sued, accusing the board of breaching its fiduciary duty.

In the case of the Roosevelt papers, it does appear that the board largely deferred to Lord Black. He arranged for Hollinger to buy the documents for $8 million in January 2001, according to one of the shareholder suits, filed by Cardinal Value Equity Partners. The seller was Glenn Horowitz, a Manhattan rare-book dealer, who had acquired the collection in a private transaction from Guernsey's, a Manhattan auction house, the previous summer, according to a person close to the transaction. Mr. Horowitz and Arlan Ettinger, principal auctioneer at Guernsey's, declined to comment.

When the Hollinger board approved Lord Black's acquisition nearly two years later, the directors justified the deal as a good investment because the price was below appraised value, according to notes of meetings of the board and its committees that were included in the Cardinal lawsuit.

Yet the only assessment of the collection's value that the Hollinger directors reviewed, according to a person close to the board, was an Oct. 22, 2002, letter to Lord Black from Mr. Horowitz, who judged the collection to be worth $12 million to $14 million, writing, ''Nothing of this magnitude and quality has ever appeared in the market. ''

The person close to the board said that people might have been concerned about the acquisition, but ''it was not easy to say, 'You have to give the books back or sell them.'''

He also said that the money involved was not very great relative to the size of the company, which had $1 billion in revenues, and a loss of $238,823, in calendar 2002.

Professor Elson questioned the board's judgment. ''Whether or not it is a good investment,'' he said, ''the company's object is to make money in the newspaper business, not to be a speculator in manuscripts.''

More to the core of Hollinger International's business may have been a case in which it transferred assets to Horizon Publications, a private company in which Lord Black and F. David Radler, who was then Hollinger's president, each held 24 percent stakes. (Mr. Radler resigned as company president last November.)

In February 2000, Hollinger's board agreed to sell to Horizon two newspapers in Washington State, The Skagit Valley Argus and The Journal of the Island of San Juan, for 50 cents each. San Juan is in Puget Sound. A spokesman for Lord Black said that he was only a passive investor in Horizon and had no operational responsibilities.

The rationale for the sale was that both papers were losing so much money that 50 cents apiece represented their fair market value, according to details of a board meeting in the Cardinal suit. A letter to the audit committee from a top-level Hollinger executive recommended the sale because it would attract less publicity if Horizon closed the papers than if Hollinger did, according to another executive close to Hollinger. Horizon did not assume any debt in connection with the purchases. But instead of closing the papers, Horizon sold The Skagit Valley Argus in the fall of 2000 to Skagit Valley Publishing, a private company, for about $450,000, according to several people involved in the transaction. Two years later it sold the Island of San Juan paper to a unit of the Black Press Group, a private company owned by David Black (no relation to Lord Black) that owns community newspapers in western Washington and Canada. A Horizon spokesman said the sale price was $280,000.

The parties disagree over whether the resale of the San Juan paper was profitable. Horizon's chief financial officer, Roland McBride, said Horizon lost $12,000 on its ownership and sale of the paper. But David Black and several newspaper industry executives said they thought that the deal made money for Horizon. Either way, there is no indication that Hollinger's board asked for a third-party fairness opinion of the newspapers' value before selling them to Horizon or that it discussed the risk of conducting transactions with a company in which Lord Black had a significant interest, according to details in the Cardinal lawsuit.

''The deals were so small that it did not seem feasible to have a fairness opinion for them,'' the person close to the board said. But Gerald Reilly, a widely known newspaper broker who is now retired, said the transactions did not sound like standard industry practice. ''If they are only worth $1, why would a big shot like his lordship want to buy it?'' Mr. Reilly said. ''It is bizarre and highly irregular, because it is not the way that newspapers are traded in the market.'' (In 2001, Hollinger sold the Mammoth Times, a weekly paper in Mammoth, Calif., to Horizon for $1, a transaction that was first described in The Wall Street Journal.)

Besides attracting criticism for not always asking enough tough questions about the sale, the board was unaware of at least one lawsuit involving Hollinger and Horizon, according to several people close to the board. The case ended with a decision handed down in August 2002 in the Superior Court of British Columbia against Lower Mainland Publishing, a Hollinger subsidiary.

The plaintiff, Paul Winkler, a former Hollinger employee, won a year's pay as severance after arguing that he had been wrongfully dismissed in 1999. According to the decision, earlier that year Horizon had bought a paper in British Columbia, The Kelowna Daily Courier, that competed with a Hollinger paper, The Kelowna Capital News, where Mr. Winkler was the publisher. The court described a strategy by Mr. Radler, then Hollinger's president and a Horizon stakeholder, that would have benefited Horizon's paper at the expense of Hollinger's.

In 1999, soon after Horizon acquired The Daily Courier, workers at the paper threatened a strike. Mr. Winkler testified that Mr. Radler told him that the Hollinger newspaper, The Capital News, would have to print The Daily Courier if a strike began, according to court records.

Mr. Winkler testified that he opposed the plan because when The Daily Courier had suspended publication in the past because of a strike, its Hollinger-owned rival had reaped the advertising benefits. When he protested, Mr. Winkler said, he was told by a Hollinger executive, J. David Dodd, who had long worked with Mr. Radler, to ''lie low and enjoy his family and skiing,'' according to testimony cited in the court decision.

Mr. Winkler also testified that later, when he again voiced his displeasure with the plan to print the rival paper, Mr. Dodd told him: ''I want to you be completely unemotional about what's going on. I can assure you Conrad Black and David Radler are.'' Mr. Winkler testified that when he raised questions about possible conflicts of interest, Mr. Dodd told him to ''stick to his knitting.'' The strike never occurred.

The court decision also describes a conversation in which Mr. Winkler said Mr. Dodd told him that the common ownership issues would not attract attention from Canada's antitrust agency, the Competition Bureau, because ''this is beneath their radar.'' But Mr. Radler acknowledged in court testimony that in 2001 Hollinger sold The Kelowna Capital News because ''the Competition Bureau was concerned about Kelowna.''

The court ordered Hollinger's Lower Mainland unit to pay Mr. Winkler $160,495, including his salary, bonus and other items. That figure might not have been high enough to elevate the matter to the boardroom, but the conflict-of-interest issue raised by the court's decision was a matter that directors might have wanted to know.

The person close to the board, who had not heard of the suit until a reporter described it recently, said he found it ''startling.'' Even if it had known about the case, whether the board would have acted is an unanswerable question, of which there seem to be many in the matter of Hollinger International v. Conrad Black.

Photos: Conrad M. Black signing his F.D.R. biography last November, shortly after its release. (Photo by Associated Press)(pg. C6); A Manhattan rare-book dealer sold Hollinger a collection of personal papers of President Franklin D. Roosevelt, pictured here working on the papers in Warm Springs, Ga., early in April 1945. (Photo by Franklin D. Roosevelt Library)(pg. C1) Chart: ''A Board Divided'' With a few exceptions, the Hollinger International board has remained largely the same since problems erupted at the company last year. But the board is now sharply divided. On one side are the eight members of the corporate review committee, who are suing Conrad M. Black. In the other camp are Lord Black and the two directors still supporting him. Chart shows activity on Hollingers board in the last year. (Source by Hollinger International)(pg. C6)

Correction: February 18, 2004, Wednesday An article in Business Day on Monday about Conrad M. Black's relationship with the board of Hollinger International referred incorrectly to the outcome of a deal in which the company sold two newspapers in Washington State -- The Skagit Valley Argus and The Journal of the Island of San Juan -- for 50 cents each to Horizon Publications, a separate company in which Lord Black held a large stake. Horizon said it lost $12,000 after it later sold both papers, not $12,000 on the sale of The Journal alone.